tax-credit-use-falls-short-of-expectations

One of the concerns with economic development tax credits and other incentives is that their cost will balloon over time, causing fiscal havoc for the issuing government. So what does it mean when these incentives are used less than expected?

We’ve noticed the following from a set of recent state incentive evaluations:

• In Oklahoma actual payments under the Quality Jobs Program from 1994-June 2017 were $1.1 billion compared to $3.9 billion of potential payments from signed agreements — 28% of the projected cost.
• In North Carolina, an analysis found the state paid $102 million under the JDIG and One North Carolina Grant programs — 25% of the projected cost.
• In Indiana, a recent evaluation of the EDGE tax credit revealed that the average share of certified dollars is approximately 60% of the contracted amount, and that 77% of the certified credits are claimed by taxpayers in the same taxable year. That means that about 46% of projected tax credits are taken in a given year. 
• In Tennesse, a 2016 analysis found jobs tax credits claimed relative to the total awarded (based on performance) ranged from 40-60%.
• In California, only $11.4 million in credits have been claimed out of $39.8 million eligible to be claimed for 2015 — about 30%.

In some cases, the low usage rates occur because businesses did not meet the benchmarks required to take the credit. In other cases, however, businesses were eligible (met their performance benchmarks) but still did not claim the credit in the year in which they were eligible. This was true in states with refundable credits (like Indiana) and those without refundable credits but that allow carryforwards (like California and Tennessee). 

Several of these states already implement good practices, such as capping programs, placing limits on carryforwards, and tying the credits to performance in order to limit the risk associated with excessive credit claims.

The findings suggest that there are other factors within the tax code and individual companies’ tax strategies that are driving the decision to claim (or not claim) economic development tax breaks.